If time could be reversed, the fundamentals of embattled big-box retailer Sears Holdings Corp (NASDAQ:SHLD) would look fantastic.
A decade ago, Sears logged $50.7 billion in sales, $826 million in net income ($5.63 per share), and free cash flow of nearly $1 billion ($6.35 per share). Last year, sales came in at $22.2 billion, and profits and cash flow have been negative since 2012. Sears stock has fallen from $142 in April 2007 to less than $10 currently.
How much time Sears stock has left is anyone’s guess. In the movie “The Curious Case of Benjamin Button,” the main character started off as an elderly man and aged in reverse. It’s too bad Sears doesn’t have that option, and recently indicated that its time as a going concern could be limited.
Corporations have an indefinite life, and healthy ones operate as going concerns, or with limited worry they will go bankrupt. On March 21 of this year, Sears filed its 10-K annual report with the SEC and stated in the filing that “substantial doubt exists related to the Company’s ability to continue as a going concern.”
This is a big problem, and the fact that Sears’ accountants required management to make the above statement calls into question the company’s ability to avoid bankruptcy. As of the end of January, Sears reported $4.2 billion in total borrowings.
Last year, Sears lost $2.2 billion, and sales have continued to plummet. Interest expense is only about $400 million per year, but there comes a point where losing so much money for so long ceases to make sense. Last year, Sears closed 37 namesake stores and 206 Kmart locations, the other embattled chain that Sears had the unfortunate ambition to acquire back in 2004. Sears Holdings had nearly 3,800 stores 10 years ago, but it’s now down to less than 1,400 today.
Is There any Value in Sears Stock?
It’s well known that the real estate Sears operates has significant value. What can be attributed to Sears stock doesn’t look significant any longer. Instead, management has steadily sold off valuable assets to try and stay afloat.
Back in 2015, the company entered into three different real estate transactions in an effort to get some liquidity out of its real estate. These deals were with General Growth Properties, now known as GGP Inc (NYSE:GGP), Simon Property Group Inc (NYSE:SPG), and Macerich Co (NYSE:MAC). Sears received a combined $429 million and 50% stake in each of the three joint ventures it set up.
More recently, SHLD sold its Craftsman tool brand to Stanley Black & Decker, Inc. (NYSE:SWK) for upfront proceeds of $525 million and a cut of sales for the next 15 years. SHLD still owns the Kenmore and DieHard brands, which actually have value. The company also owns 12% of Sears Canada Inc. (NASDAQ:SRSC), which sports a market capitalization of just less than $88 million.
SHLD also created a new real estate investment trust to house specific properties. Seritage Growth Properties (NYSE:SRG) owns 235 properties, most of which are Sears and Kmart sites, and has partial ownership percentages in the 31 other properties from SHLD’s joint ventures. As far as I have found, Seritage was completely spun off and Sears Holdings doesn’t own a stake in SRG, though there are many lease arrangements between the two entities.
There’s No Turning Back Time for Sears Holdings
After scrubbing through SHLD’s financials for signs of value left in Sears stock, I am left with the impression that anything with significant value has already been hocked to help support the dying store base. One has to wonder if Sears should have liquidated long ago, which would have left significant real estate and business value in the many brands the company owned outright, not to mention some relief for SHLD stock investors.
A short recommendation is also hard to make, given there are so many moving parts between Sears Holdings, the entities it has spun out, and the company’s intertwined business dealings with Eddie Lampert, who owns nearly 60% of the outstanding SHLD stock shares. In other words, if Sears liquidates, SHLD investors could be left with positive value.
This occurred when General Growth Properties emerged from bankruptcy back in 2010. Seritage Growth Properties looks much more interesting, though. It has tangible real estate holdings and a 2.35% current dividend yield. SRG could also benefit from the bankruptcy of SHLD — it could either sell off the real estate holdings or put them to more productive use.
As of this writing, Ryan Fuhrmann did not hold a position in any of the aforementioned securities.
